When young people are first starting off their financial lives, it can seem as if their paycheck evaporates just paying for rent, a car, and their student loans. After gaining some experience with budgeting, getting established, and perhaps a pay raise, however, many of these same people start to have some spare money that they want to invest. The question is, where should they invest this money?
The first question should really be, what do they want to do with the money? There are thousands of investment options available, but not all of them are right for every person. To start, a new college graduate needs to sit down and think about what they envision doing with the money they make from investment. Saving for a down payment or a secure emergency fund are going to require different investment strategies.
Of course, there is no reason why a person shouldn’t try to achieve several different goals at once; in fact, it’s advisable. Saving for retirement typically works best when people start as early as possible. Meeting a short or medium-term savings goal for a major purchase, such as a home, is usually a goal that people feel very motivated to save towards. This means that a person needs to have separate investment strategies for separate parts of your money
An investment time frame of ten years or more is considered long-term by most financial advisers. In this amount of time it can be next to impossible to predict exactly what a given market will do, so most advisers recommend a diversified portfolio. This prevents a catastrophic failure on the part of a single sector of the market from completely wiping out what will become a lifetime of savings. Diversification can also help to even out the highs and lows that will occur over a long period of time.
Most important is making the right decision on what to invest in. One of the great advantages to starting off long-term savings at a young age is that there is a lot of room to take risks. Investments that experience a prolonged slide can be purchased at a low point, and the investor has the luxury of time to wait for these purchases to rise again. For this reason, it is usually recommended that the portfolio of a young long-term investor have a heavy emphasis on investing in stocks.
Medium and Short Term Investments
Saving an emergency and/or house fund is a common goal for many people, and most of them would prefer to get more than the paltry interest rates offered by most savings accounts. At the same time, this money cannot afford to go through the wild swings of some investments. Fortunately, there are ways to get better returns and still protect principal.
A portfolio with some small exposure to mutual funds, and much larger exposure to bonds and even CDs or a money market, can provide a person with a good return, but also leave some money completely protected.